CH 7-12

Contract requirements

1. There must be an offer and an acceptance 2. There must be consideration 3. The parties to the contract must be competent 4. Its purpose must be legal 5. The contract must be in legal form

Agency elements

1. principal: Individual who creates an agency relationship with a second party by authorizing him or her to make contracts with third parties (policyholders) on the principal's behalf. 2. agent: Individual who is authorized to make contracts with a third party. 3. apparent authority : The implied authority of the agent to fulfill the principal's responsibilities.

Respondeat Superior

A Latin phrase (let the master answer) referring to the doctrine that the master (Principal) is responsible for the actions taken by his or her servant (Agent) while agent is acting on behalf of the principal.

Unfair practice

A catch-all term that can be applied to many undesirable activities of agents, claim adjusters, and insurers.

brokers

A considerable amount of insurance and reinsurance is placed through brokers. A broker solicits business from the insured, as does an agent, but the broker acts as the insured's legal agent when the business is placed with an insurer.

ceding commission

A fee paid by the reinsurer to the original insurer.

insuring clause

A general statement of the promises the insurer makes to the insured.

Actuarial Analysis

A highly specialized mathematic analysis that deals with the financial and risk aspects of insurance.

stare decisis

A legal doctrine that obligates courts to follow historical cases when making a ruling on a similar case.

insurable interest

A person has an __________ _________ in something when loss or damage to it would cause that person to suffer a financial loss or certain other kinds of losses.

extra expense losses

Additional costs incurred by organizations that choose to continue operating following property damage.

independent agent

Agent who usually represents several companies, pays all agency expenses, is compensated on a commission plus bonus basis, and makes all decisions concerning how the agency operates

exclusive agents

Agents permitted to represent only their company

conditional binder

Agreement that implies that coverage exists only if the underwriter ultimately accepts (or would have accepted) the application for insurance.

endorsement

An amendment to a policy adjusting the coverages and taking precedence over the general contract.

facultative arrangement

Arrangement in which both the primary insurer and the reinsurer retain full decision-making powers with respect to each insurance contract.

treaty arrangement

Arrangement in which the original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged treaty, and the reinsurer is obligated to accept certain responsibilities for the specified insurance.

binding authority

Authority that secures (binds) coverage for an insured without any additional input from the insurer.

commissioner of insurance

Chief insurance regulator in a state. Head of a state insurance department or division that administers insurance laws.

License Denial

Circumstances in which this happens: 1. If the management is incompetent or unethical, or lacking in managerial skill. 2. If any company has been in any way associated with a person whose business activities the insurance commissioner believes are characterized by bad faith.

definitions

Clarifies the meanings of certain terms used in the policy.

insurance regulatory laws

Common types include licensing requirements, solvency standards, liquidation/rehab provisions, rating (pricing) restrictions, trade practice requirements, subsidy programs, and taxation

direct writers

Companies that market insurance directly to customers

E&S Lines insurers (excess and surplus)

Companies that provide coverages that are not available from licensed insurers. This doesn't mean they are operating illegally. E&S markets allow insurers, agents, brokers and insureds to design specific coverages and negotiate pricing based on the risks to be insured.

Loss Year

Composed of: 1. Paid loss cost 2. Reserved loss cost 3. Incurred loss cost (this is equal to paid + reserved) 4. Incurred by not reported (IBNR). The loss has happened, but you don't know about it when the policy expires 5. Loss development factors

hard market

Condition that occurs when insurance losses are above expectations and reserves no longer are able to cover all losses. Insurer's pricing power increases

soft market

Condition that occurs when insurance losses are low and prices are very competitive. Insurer has limited pricing power

Premium Audit

Conducted to verify that exposures are in line with premium

Adhesion contract

Contract between two parties, where the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate more favorable terms and is thus placed in a "take it or leave it" position. Disputes will usually be resolved in ways most favorable to the party that did not write the contract

incomplete contracts

Contracts that contain terms that are implicit rather than explicit.

relational contracts

Contracts whose effects are based on the relationships between the two contracting parties. The outline of the contract is explicit, but details can be vague.

state

Currently, most insurance regulation occurs at the _______ level

Risk based capital

Describes assets, such as equities held as investments, with values that may vary widely over time.

insurance contract

Document received when one transfer risks to the insurance company; is the only physical product received at the time of the transaction.

Incurred but not reported (IBNR) losses

Estimated losses that insureds did not claim yet but are expected to materialize in the future.

Claim service

How the insurance company delivers on the promises contained within the insurance policy. It is the ultimate indicator upon which the quality of the product provided by insurance depends.

underwriter

Individual who decides whether to insure exposures and how much to charge in premium.

actuary

Individual who determines proper rates and reserves, certifies financial statements, participates in product development, and assists in overall management planning.

twisting

Inducing a policyholder to cancel one contract and buy another by misrepresenting the facts or providing incomplete policy comparisons.

foreign insurers

Insurers formed in another state

GLBA (Gramm-Leach-Bliley Act)

Insurers required to take extraordinary means to assure data security. Must notify you of your privacy rights

concealment

Intentionally withholding a material fact. The insurer has the right to void the contract.

claim practices

It is unreasonable to expect an insurer to be overly generous in paying claims or to honor claims that should not be paid at all, but it is advisable to avoid a company that makes a practice of resisting reasonable claims.

ECOA (Equal Credit Opportunity Act)

Law requiring that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within sixty days

law of agency

Law that deals basically with the legal consequences of people acting on behalf of other people or organizations.

business interruption

Losses that occur when an organization is unable to sell its goods or services and/or unable to produce goods for sale because of direct or indirect loss

Engineering and Loss control

Methods of prevention and reduction of loss whenever the efforts required are economically feasible

binding

One of the most important agency characteristics is ________ authority

incurred losses

Paid losses plus known, but not yet paid, losses

Rebating

Providing substantial value as an inducement to purchase insurance

other insurance clause

Provision in a policy that apportions the insurer's financial responsibility so that payment in excess of the insured's loss is avoided

Proportional (Pro rata) reinsurance

Situation in which the reinsurer assumes a prespecified percentage of both premiums and losses.

Misappropriation

Situations in which the agent keeps funds belonging to the company, the policyholder, or a beneficiary

insurance policy components

Six major parts: Declarations, insuring agreement, exclusions, conditions, definitions, and endorsements and riders

representations

Statements concerning an insured's risk exposures.

cash flow underwriting

Strategy pursued when the combined ratio is low, in which the industry lowers its underwriting standards in order to obtain more cash that can be invested.

SAP (Statutory accounting)

System of reporting of insurance that allows companies to account differently for accrued losses

true

T/F: A company that issued policies no larger than its retention would severely limit its opportunities in the market.

binder

The agreement that exists before a contract is issued. It can take months for you to receive the actual insurance policy, especially if it's a commercial policy.

true

The average combined ratio for the property and casualty insurance industry is 1.07. So for every premium dollar collected, they pay out $1.7 in claims and expenses. Profitability (if any) comes from investment income.

Assuming reinsurer

The company taking over the risk in a reinsurance arrangement

material facts

The company taking over the risk in a reinsurance arrangement

ceding insurer

The company transferring risk in a reinsurance arrangement.

Rate calcuations

The computation of how much to charge for insurance coverage once the ultimate level of loss is estimated plus factors for taxes, expenses, and returns on investments.

expectations principle

The event of a dispute, courts will read insurance policies as they would expect the insured to do.

standard fire policy

The generally accepted method of insuring against property loss due to fire until being replaced by homeowners policies and commercial insurance options.

indemnity

The insurer agrees to pay no more (and no less) than the actual loss suffered by the insured. "Restore to pre-loss condition"

waiver

The intentional relinquishment of a known right. To do this, a person must know he or she has the right, and must give it up intentionally.

coverage limit

The maximum amount an insurance company will pay if you file a claim.

underwriting cycles

The movement of insurance prices through time

consideration

The price each party demands for agreeing to carry out his or her part of the contract.

underwriting

The process of evaluating risks, selecting which risks to accept, and identifying potential adverse selection

offer and acceptance

The process of two parties entering into a contract.

direct loss

The value of property that is physically destroyed or damaged, not including the loss caused by inability to use the property.

Reinsurance types

These include treaty, facultative, and a combination of the two

credit scoring

This is sometimes used by underwriters to evaluate risk of a potential insured

Open-perils

This policy (formerly called "all risk") covers losses caused by all perils except those excluded

Named-Perils

This policy covers only losses caused by the perils listed in the policy.

insurance contracts

________ __________ are: based on utmost good faith, contracts of adhesion, and contracts of indemnity

agents brokers

________ represent the insurance company, ________ represent the buyer

combined ratio

a measure of the relationship between premiums taken in and expenditures for claims and expenses. In other words, it is the loss ratio (losses divided by premiums) plus the expense ratio (expenses divided by premiums)

indirect loss (consequential)

a nonphysical loss, such as loss of business

internet

aggregator of several insurance coverage options

reinsurance

an arrangement by which an insurance company transfers all or a portion of its risk under a contract (or contracts) of insurance to another company. AKA insurance for insurance companies

State Guaranty Funds

are security deposit pools made up of involuntary contributions from solvent, state-regulated insurance companies doing business in their respective states to ensure that insureds do not bear the entire burden of losses when an insurer becomes insolvent

declarations

are statements that identify the person(s) or organization(s) covered by the contract, give information about the loss exposure, and provide the basis upon which the contract is issued and the premium determined.

punitive damages

awards intended to punish an offender for exceptionally undesirable behavior

conditions

clauses in a policy that enumerate the duties of the parties to the contract and, in some cases, define the terms used.

domestic insurers

companies chartered in a state are known as ...

application

identifies the insured in more or less detail, depending on the type of insurance. It also provides information about the exposure involved.

alien insurers

insurers organized in another country

business interruption coverage

is triggered by a physical loss that interrupts normal business operations. The cause could be a fire affecting a single building or a natural disaster

estoppel

occurs when the insurer or its agent has led the insured into believing that coverage exists, and consequently, it means that the insurer cannot later claim that no coverage existed.

actual cash value

replacement cost minus depreciation, an insurer may prefer to value personal property this way instead of replacement cost

GAAP (Generally Accepted Accounting Principles)

the acceptable system of accounting for publicly traded firms

loss development

the calculation of how amounts paid for losses increase (mature) over time for the purpose of future projection

float

the concept that insurance companies take in money (premium) at the beginning of the policy period, but may not have to pay it out in the form of a claim until sometime later, if at all. They can invest the "float" until called upon to pay claims.

subrogation

the substitution of one person or group by another in respect of a debt or insurance claim, accompanied by the transfer of any associated rights and duties

exclusions

these can include locations, property, losses, and perils

uberrimae fidei

utmost good faith- potential insureds are held to the highest standards of truthfulness and honesty in providing information to the underwriter or potential insureds are held to the highest standards of truthfulness and honesty in providing information to the underwriter.